Francesco Scatena/iStock via Getty Images
Francesco Scatena/iStock via Getty Images
TransAct Technologies Incorporated (NASDAQ:TACT ) is a global leader in the development and sales of software-driven technology and printing solutions. The Company has had immense success with their BOHA! ecosystem and is in the early innings of a recurring revenue business model transformation. We initiate with a BUY rating and an $11.00 price target.
TransAct Technologies Incorporated is a global leader in the development and sales of software-driven technology and printing solutions for several key industries which include the foodservice industry, point of sale (POS) automation, and the casino and gaming industry. Through their virtual duopoly position within the casino printer industry, TACT has been able to fund a transition from one-time revenue sales to a higher-margin recurring revenue business model.
TransAct's primary markets include food service technology, point of sale automation, and casino and gaming. TACT initially was spun out of Tridex Corporation through an IPO in 1996 and has remained public ever since. Over the years, TACT has switched focus to whichever area is most profitable. We believe their current focus on BOHA! (Back-of-house automation) is the most prudent for long-term value creation.
This segment is composed primarily of the BOHA! ecosystem. BOHA! combines a touchscreen terminal with cloud-based software to offer an all-in-one solution for the automation of back-of-house operations in convenience stores, restaurants, and other foodservice operators. Through this offering, TACT offers everything from automated inventory management, temperature monitoring of food and equipment, food safety labeling, checklists, procedures, and many other offerings that help automate back-of-house operations.
A BOHA! terminal essentially combines a touchscreen with a print mechanism that can print easy-to-read food labels, grab-and-go labels for foods, nutritional labels, and best by or enjoy by date labels. These terminals, concurrently through cloud-based software, also keep track of other back-of-house operations such as inventory management. Included within the FST segment are also sales of TACT’s previous generation back-of-house offering that generates less recurring revenue called AccuDate.
BOHA! is a recurring revenue business model. Once a customer purchases a BOHA! terminal for $500-$800, they have a 3-year average contract with TACT to pay for the software, services, and labels. TACT offers customizable labels that have very competitive pricing. According to management’s forecasts, the typical annual ARPU for a BOHA! unit is $1,000-$1,200. However, this target has fluctuated since each restaurant is different.
ARPU for BOHA! contracts range from $500 to $2,500 for more software-based restaurants. From conversations with management and industry analysis of competitors’ margins on similar terminal type products, we believe BOHA!’s recurring revenue has a gross margin of at least 50%-60%, which is well above the Company’s corporate average. By the end of Q4:21, the Company had annual recurring revenue from BOHA! of at least $9.8 million which we believe will continue to grow. The $9.8 million is calculated by multiplying an ARPU of $1,000 by 9,818 units.
TACT sells POS printers that use thermal printing for the quick-service restaurant market (QSR). These POS printers are typically the printers at the checkout counter that print receipts. TACT’s primary customer has been McDonald's (MCD) ever since 2008 when McDonald's needed a better performing POS printer. The primary product offering to McDonald's has been Ithaca-branded printers. However, management has stated that due to the success of BOHA! and lower margins of POS printers, they expect this segment to decline as they have turned their full attention to BOHA!.
This part of TACT’s business primarily sells printers directly to manufacturers of slot machines and video lottery terminals and other gaming machines that print tickets or receipts instead of coins at casinos. The primary product line is TACT’s EPIC series and the primary customers for TACT are slot machine and other gaming machine manufacturers. For example, whenever you cash out of a slot machine and that machine prints a payout ticket, that ticket can be inserted into another slot machine as currency or redeemed for cash at a cash-out machine. Given TACT’s strong niche positioning in this market, there is a good chance that TACT’s printer was used to print the payout ticket in this example.
Within this segment also is TACT’s software solution for casino promotions using printed tickets through their EPICENTRAL Print System. While this segment was hit hard by the Covid-19 pandemic, we believe that in the long run, casinos will revert to their historical mean of replacing 5%-10% of their slot machines every year on average. Through this constant replacement cycle, TACT has a very sticky revenue stream. Furthermore, this revenue is protected by the high degree of regulation within the gambling industry which requires any potential new entrant to have several government certificates. TACT’s major competitor in this segment is Japan Cash Machine and management estimates TACT has a combined 70-80% market share of the casino and gaming printer market.
This is TACT’s printer segment that was focused solely on the oil and gas exploration industry. Printrex was acquired in 2011 for $4 million and has slowly dwindled over the years since the 2014 oil crash. Going forward, management is exiting this business and will only sell a small number of consumables for previously sold printers until 2025.
TSG provides all consumable products, replacement parts, maintenance, and repair services for customers that have purchased printers within the POS automation and casino segment. These consumable products are generally POS receipt paper, inkjet cartridges, ribbons, and other printing supplies. TSG also includes the sales of warranties, various contractual maintenance agreements, and other general repair services for customers who have purchased a TransAct printer or terminal.
TACT also operates a supplies website that sells these various products and services that are included within the TSG segment. We believe the margins within this segment to be higher than the corporate average but assume management’s commentary that this segment will slowly decline over time as less emphasis is placed on POS printers being sold. This decline is also reinforced by the belief that less consumable products and repair/maintenance services for previously exited businesses will be sold as those previous printers become retired.
The Company is led by Chairman and CEO Bart Shuldman who has been with the Company since its IPO in 1996. Mr. Shuldman also led the Company under its prior owner before the IPO. Prior to TACT, Mr. Shuldman spent 10 years with General Electric and graduated from the GE Manufacturing Management Program. The Company is also led by President, CFO, Treasurer, and Secretary Steven DeMartino. Mr. DeMartino has also been with the Company since its IPO in 1996. Prior to TACT, Mr. DeMartino was a Controller for Copart and an Accountant for PricewaterhouseCoopers.
In August 2020 and August 2021, the Company raised capital through public offerings of common stock. The Company reported ~9.85 million shares outstanding in their most recent Q4:21 filings.
Revenue grew 43% to approximately $11.1 million in Q4:21, compared to $7.8 million in the same quarter one year ago. The revenue growth over Q4:20 was driven primarily by TACT’s foodservice technology segment and the remaining segments partially returning to pre-pandemic sales levels.
Currently, due to supply chain issues, TACT’s inventory of casino and gaming printers is low, but management believes these levels will improve soon.
Total operating expenses in the fourth quarter of 2021 totaled $6.9 million, compared to $5.0 million in the same quarter one year ago. The increase in operating expenses was primarily driven by increases in sales and marketing and research and development for BOHA!. The Company’s adjusted EBITDA, a non-GAAP financial measure, decreased to $(2.1) million from $(1.7) in Q4:20.
Historically, the Company has not provided any guidance. Management has, however, provided guidance of BOHA! annual unit installations to be 6,500 to 7,500 for 2022 and FST recurring revenue of $10.5 million to $11.0 million for 2022. Historically, since TACT’s IPO, the casino and gaming segment has almost always had annual revenues of $20-25 million. Due to TACT’s significant revenue dependability for the casino and gaming segment, we model for $20 million of revenue in 2022.
Considering TACT still has ~7,000 BOHA! units to be installed in 7-Eleven stores, we believe TACT will easily achieve guidance of annual installations of BOHA! units to 7,000 in 2022 and then increase to 8,000 in 2023. This number is up from ~2,900 installs in 2020 and ~4,100 installs in 2021. Both 2020 and 2021 were impacted by Covid-19 and labor shortages which we believe will improve by the back half of 2022. Annually, for BOHA! installed units, we use a weighted average ARPU of approximately ~$1,000 in 2022 and 2023.
We value TACT using a blend of peer multiples and a Discounted Cast Flow model (DCF). The multiple we use to value TACT is an EV/Sales multiple.
Valuing TACT is somewhat difficult given the Company is in the early innings of a recurring revenue transformation combined with a lack of public competitors that compete in a similar space within the food service technology segment. Furthermore, given the virtual duopoly position within the casino and gaming segment, the only major competitor is a micro-cap Japanese firm with no covering analysts.
We take TACT’s industry average EV/Sales multiple and apply a 25% discount to account for BOHA!’s size and unique market position. Furthermore, we believe this discount is warranted because BOHA! is not a 100% software-based revenue stream like several of the comparable companies in our relative valuation listed below. The multiple-based target price discounted back is $9.92. We then take this result and average it with our DCF valuation of $12.24 to come to a final share price of $11.08, which we round to $11.00 a share.
The Exhibit below summarizes our peer group multiples.
Company Filings and Singular Research Estimates
Company Filings and Singular Research Estimates
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Disclosure: I/we have a beneficial long position in the shares of TACT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.